The Fundamental Advantage Real Estate Investing Has Over Stocks

Investing money in things is essentially the core principal of capitalism. Putting money (capital) into something now and assuming some amount of risk in exchange for the potential of profits down the line is literally why we call it capitalism. The system does, however, strictly demand that risk of failure be part of the equation. That’s why we have laws against insider trading, laws against using your IRA to get even indirect benefits today instead of holding them until you retire, and so on and so forth. But there is a dearth of such laws when it comes to investing in real estate.

We have almost nothing against investors doing everything possible to mitigate the risks they take—and it’s here that investing in real estate shines above and beyond more volatile systems like the stock market. That’s because, unlike with other forms of investment, there’s no such thing as “insider trading” in real estate. There is no information you could acquire that you aren’t allowed to use to decide what properties to purchase, when, and for how much, and that information asymmetry between you and other players in the real estate game puts a lot of power in your hands.

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The Lag Between Planning and Execution is Your Best Friend

When you work for a big business and you know that your company is about to announce the successful development of the jPhone (“The jPhone: It’s one better than the iPhone!“), you aren’t allowed to buy a bunch of stocks in preparation for the announcement and then sell them once their value jumps up in response to said announcement.Related:Why I’d Choose to Invest in Real Estate Over Stocks Any Day of the Week

But when you live in a neighborhood and you see that an old lot that’s been sitting for years is the site of a trendy new restaurant in the making or you hear that the city council had decided to invest a few million dollars into beautification and revamping some particularly difficult intersections, you are 100 percent allowed to start investing in real estate all over the neighborhood and sell it once the value jumps up in response to the work being completed.

This works because the real estate market reflects the current reality of the economic and physical environment around it, not the plans or the future conditions thereof. This is different than the stock market, which responds fluidly and promptly—like, within minutes—to the announcement of plans, news, or catastrophes. It’s much easier in real estate to see big plans coming a ways away and respond to them before they start to affect land and home values—so you can pocket the gains of those effects yourself.

How to Find “Insider Information” on Real Estate

So, knowing that real estate investment’s principle advantage is one of information, how do you find the kind of information that you can use in this way? There are several answers.

Keep up with the city leadership. It doesn’t matter whether your city is a big as Detroit or as tiny as Attica. There’s going to be some way for the interested to track the goings-on in city hall. These goings-on often include strong hints (i.e. rezoning ordinances or traffic revisions) or out-and-out declarations of planned investments and major improvements. In many places, simply following the city on Facebook can be a vast source of information.

Get buddy-buddy with the Chamber of Commerce. Attending Chamber functions and gossiping with Chamber functionaries can reveal quite a bit about the plans of local businesses. Equally importantly, listening to the complaints of local businesspeople can occasionally give you insight into the plans of the big businesses that the locals are worried they’ll have to compete with. Learning that a Trader Joe’s is coming to a particular low-to-middling neighborhood, for example, is a very solid indicator of a good investment opportunity.

Drive around!If nothing else, coming across a significant new construction and investigating it to find out what’s going up there. This is probably the least effective way of gathering intel—it’s more of a matter of serendipity than one of planning —but it’s not one you should ignore if “seren” happens to “dip” right in front if you. This can even include seeing a prominent house on the block being renovated, though obviously that effect will be much smaller than seeing a Costco going up just up the street.

The Cloud to All This Silver Lining

Of course, there is a flip side to this coin as well, and that is time-to-profit. Stock markets’ volatility keeps you from being able to take advantage of information asymmetry to the degree that real estate can, but it also allows you to make a profit in a matter of seconds. Investing in real estate takes weeks at the absolute fastest to turn a profit, and if you’re looking at the future plans of businesses and municipalities to drive your investment, you’re almost certainly looking at months or years of lead time. (Also, a stock you can buy for the price of a VCR stands a good chance of being a passable investment—a house you can buy for the price of a VCR is almost certainly a trap.)

Nevertheless, if you’re considering getting into investing in real estate—or, like many modern investors, you had real estate investment thrust upon you by strange twists of recession-related fate—understanding the most fundamental advantages that make real estate investment worthwhile is a huge step toward investing intelligently.

What do you think is the biggest advantage real estate has over stocks?

Let me know with a comment!

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15 Comments

The author makes the mistake of confusing commercial real estate with residential real estate. If a Costco or chain restaurant is going up next to my 4500 SF custom home, that is bad, very bad. If older houses are being knocked down or undergoing major rehab, that is good.

If I can buy or option a vacant commercial lot and Costco builds next door, that is good.

The author also incorrectly assumes that no one else will get word of the new Costco or new Olive Garden and he will get the big scoop by driving around or attending Chamber of Commerce meetings. Perhaps he should realize that the big stores and chains hire professional site location companies that scout out sites for years based on traffic, demographics, zoning, path of development, etc. etc. They are pretty good at keeping intentions secret. If Costco is interested in my 25 acres of vacant land, the price just went up baby! The author thinks nobody else goes on Facebook??? If it is on Facebook, it is public information and it will be quickly reflected in the property value. DUH!!!

Real estate prices do rise and fall based on news of what may and may not happen. That’s why it’s called real estate speculation. If the city announces they are building the new city dump next to my house, my property just lost a ton of value, even if the dump won’t be complete for 10 years. Agree that change does not happen in milliseconds as with the stock market, but it happens quickly.

There are no specifics in this fluff piece. Did the author buy land next to some new Detroit interstate highway no one else knew about? Did they build a new football stadium next to his abandoned 2 unit in Downtown Detroit? What Up Dog?

One final rebuttal of this silly piece: The 2016 Olympics. They were going to come to Chicago. Obama promised it. The Daleys promised it. A few speculators bought land near the proposed site, because it was a “sure thing”. I have a Brazilian Bikini wax to prove the Olympics was not held in Chicago.

Kind of naive, silly, worthless article. I love real estate and I own a fair chunk of it. Do your homework, understand the fundamentals. Buy based on numbers TODAY. Buying based on speculation is speculation. Zoning does not always get approved. Politicians get voted out of office. Recessions happen. Bubbles happen.

Sorry to be harsh, but I am fed up with so called pros writing misleading drivel. Seriously, this piece should be taken down, ok BP?

“The author makes the mistake of confusing commercial real estate with residential real estate. If a Costco or chain restaurant is going up next to my 4500 SF custom home, that is bad, very bad.”

Zoning usually will prevent this. That’s not what the author was getting at.

He’s talking about examples of the city going in and improving an area. Whether that’s adding shopping options that improve what the area has access to (maybe it had no grocery stores nearby?), or a new high value development going in, or the city going in and “greenscaping” the block.

Here’s an example in my region: a huge developer bought up a ton of land right next to what was literally the worst neighborhood in town, affectionately known as “Felony Flats”. The development goes right up to the border of the worst houses in town, where half the houses look like meth labs.

The new development, however, were some of the highest end townhomes in the city. On top of that, they set aside an area of the development that was turned in to a small strip mall and added a health clinic and grocery store. “Felony Flats” didn’t have a grocery store besides one or two small convenience stores with bars on the windows. You had to travel to get to anything.

People who bet on the development made out wonderfully. The values of all of the properties within a few blocks of the development have been skyrocketing and the grocery store hasn’t even finished construction and only half of the strip mall is up. The plans for the development have been available forever.

Funny enough, the common wisdom among investors has still been to avoid felony flats because people buying there were just speculators and the area was too low-quality for good tenants. But now that the development is up, common wisdom has reversed itself in the last 10 months and everyone is tripping over each other to rehab crappy old houses there.

Hi Chris, Kudos, you actually used a specific example, unlike the author. The huge developer you referenced literally changed the market for the better and he/she was richly rewarded. This has been going on in the Chicago metro and many other areas for many years. It is not a secret. It is not “inside” information. It is not something that investors can find out on Facebook that no other investors will know about. It is not “betting”. I am sure the developer spent many years researching and analyzing the area before moving. The developer may have even owned a bunch of the property for many years before buying up some more. A low cost basis makes the “bet” much safer. You even state Chris, that plans for the development were available forever. How is this secret insider information that the author is urging people to drive around and find? Your real world example and the author’s fantasy are very different things.

My issue with the author is he is leading readers to believe that there is some type of huge advantage to be gained over other investors ( including very savvy developers) by merely driving around and going to Chamber of Commerce meetings. Nothing wrong with that. Nothing wrong with having a buddy down at City Hall. Nothing wrong with keeping your eyes open. As I said: Do your analysis, do your research, run your numbers, do your due diligence. Stop looking for secrets. They simply don’t exist.

I’m saying that third party investors, like you or me, who checked with the city, were aware of the plans for the development, knew it would change the market, and bought up properties in “Felony Flats” ended up seeing 50%+ appreciation.

In other words, being aware of the development allowed independent third parties to make a lot of money.

I can think of a ton of examples of this just in my city. Being aware of where a new bus/rail line is going to go up before there are visible signs of constructions, or being aware of where a new development is going to crop up, or which street a city is going to rehab and greenscape or convert in to a walkable urban environment, gives you a leg up.

The guy you’re negotiating with to buy the property who may have owned it for 20+ years and hasn’t kept up on what’s changing lacks that information. That’s something you never find in the stock market that gives you a huge advantage.

“Stop looking for secrets. They simply don’t exist.”

See, I disagree with this. There are tons of secrets, and negotiating depends on them. Sometimes those secrets are in plain sight- for example, an out of state investor might not know that rents have gone up 20% in the last six months. I used this to get a great deal in a recent transaction.

This inefficiency- where parties are operating based on different information- happens very rarely in stocks, where most buyers are institutional and the market reacts rapidly to any public information.

Hi Chris, let’s agree to disagree and I will be done with this ( the weak article is simply not worth it!) You are talking about normal and good urban development, which savvy investors get in front of. A new bus line and a new rail line is NOT a secret. They are planned FOR YEARS before ground is broken and there are visible signs of development. The unions, their buddies, zoning boards, plan commissions, transportation committees are all involved before Joe Schmoe sees ground being broken. Ditto for new shopping malls and high rises. Neighbors have to be notified ( and frequently object) , public meeting will be held etc . All before the first leaf on the first tree is knocked down.

An ignorant out of state investor is not a secret. It is an ignorant out of town investor. Rents are easily ascertained on the local MLS, Trulia, Craigslist and on and on and on. Rents are not secret.

What you may be trying to say is that real estate buyers and sellers are not always motivated by price. Real estate is not 100% transparent and efficient unlike the stock market which trades thousands of times per second and is theoretically efficient. An estate seller might want something very quick and easy and be willing to sacrifice a lot of money in the process. Ditto for divorce. A buyer may need really good terms and be willing to pay more. A family that lives in a war zone may welcome any offer that allows them to move to a better part of town. And to use your example, owners may know that their property is appreciating, but they have bought their condo in Florida and may be happy to sell to you, even though the bus line will be 2 blocks away 4 years down the road. The money now is worth something to them. They are not stupid, there are very few secrets that are not illegal.

FYI, the Real Estate guru model of taking advantage of stupid sellers and stupid buyers in this age of the internet has been thoroughly disproven. Finding a motivated seller and finding out what they need and getting them what they need is not insider dealing and is available to anyone who is willing to put in the work.

Gary, it appears you are looking at BIG developments — about which you are 100% correct. If a Costco-type company is planning a move, most commercial real estate agents and companies know about it and do what they can to get in on the deal or at least piggyback on the new development.

Chris seems to realize who our target for this article was — the small-time residential investor looking for a great deal they can profit a bit on now and even more when they retire. His Felony Flats example is perfect for what we’re trying to convey. Detroit has several similar projects going on — a new hockey/basketball stadium, a new light-rail system, etc.

The average small investor can do pretty good for themselves if they if they properly leverage this information correctly. Is it a “secret”, not in the specific sense of the word/concept, but knowledge is power only when it is USED. As Chris pointed out many knew about the new development next to Felony Flats, but failed to act until later, The same thing happens over and over and over again….

We wanted to try and bring readers’ attention to this issue as so many people don’t seem to realize what’s going on under their noses! Many property owners won’t realize what’s going on either and will sell at prices advantageous to investors that are hustling and getting out in front of development news.

Good high level introduction to an essential part of doing due dilligence before investing in a particular property. So many things can affect property values including demographic trends, business trends, etc. For example investing in an area with only one major employer is probably not a good idea: you might as well invest in that company’s stock. investing in areas with rising incomes, diverse employers, rising population, good schools, is a much better idea.

Thoroughly researching areas you are thinking of investing in can make a huge difference. Of course, you need to be carefull to invest for cash flow, after taking all risks into account. If you do that, then the kind of information you are talking about can be factored in to the decision of which cash flowing property is better to invest in. Obviously, if there were two equally cash flowing properties, in different neighborhoods, you would want to invest in the neighborhood that had city improvements, new jobs, new stores, or some other appreciation driver.

To answer your question: as I see it, the two fundamental reasons to invest is real estate vs the stock market are tax benefits and risk mitigation. There are a zillion great articles here on BP about the tax benefits of deductions, depreciations, etc. For me, risk mitigation is much more important. IN the stock market there are two basic risk mitigation strategis that I understand:
1) diversify: invest part if your money in lots of different market sectors, in domestic and international stock, in bonds as well as stocks. WHy? So that when (not if) a stock fals, or a market crashes you don’t loose everything. THe downside of this is that a large portion of your money ends up being invester,formvery little return, in bonds, for example. THe other downside is that it is impossible to predict retirns, crashes, etc, no matter how much analysis you do. maybe you can. I can’t
2) invest in market index funds, and wait out market crashes: better than 1) but not great

In real estate, I have the opportunity to identify and mitigate the risks. That is something that can be learned, and which I can define as strategies for determining which properties I buy. I can have a home inspector identify potential problems before I buy. I can learn to be my own home inspector, if I choose.
I can get contractors to estimate the costs to fix the problems. I can use that info to negotiate the price down, or to chosse not to buy that property. I can determine my expenses before I buy, and thus determine my ROI. I can look at dempgraphics, city plans, and many other sources of infortmation to determine the likelihood of the property continuing to cash flow in a down market. Creating the list of risks for a property is not rocket science, nor is determining how much each risk is likely to cost, and figuring out how to factor that into your deal. You make your money by only buying good deals. Unlike the stock market, if you run yoir numbers conservatively, not speculatively, it is deterministic: you will either make what you predicted, or more if you get lucky. You can set up your deal so will not loose, even if some of the risks occur. You certainly can’t say that about the stock market.
CJ

In our opinion, the average “Joe” looking for an investment has little control in the stock market. To use the examples of Gary & Chris, Wall Street is like the big developer Chris mentioned that had the money and influence to make their own market. What chance does an average “Joe” have against Wall Street or a big developer? The average “Joe” can’t reset or make markets like billion-dollar hedge funds or multi-million dollar developers.

All an average “Joe” can do is invest in mutual funds or REIT’s, where their betting on the expertise of someone else to manage their money…

…OR they can try to leverage the common knowledge of what the “big boys” are doing and grab their coattails. We see this being safer to do in real estate than on Wall Street. Chris’s example of Felony Flats shows how it can be done. Not was simple to do on Wall Street or as safe.

1. It’s illiquid (relative to stocks). It’s not traded on an exchange. The Efficient Market Hypothesis they taught us in Business School doesn’t apply. All shares of GE common stock are all worth the same at a given instant, and you can never buy them for less than their full retail value at that moment. Obviously, that’s not true of real estate.

2. I could buy collectibles – coins, stamps, Persian rugs, baseball cards, or Beanie Babies. They’re not traded on an exchange either, so are also illiquid. $100K or $200K or $500K coins are not unheard of, but they’re special enough that when they’re sold, it’s usually at auctions that are well attended, and both buyers and sellers are quite sophisticated. So it may as well be on an exchange. In contrast, there are thousands of $100K+ houses in every city that are bought and sold every day with little fanfare. But the biggest reason I prefer real estate is:

3. Financing! Financing is what creates motivated sellers. The ones that will at a discount (if there is equity), or just give me their house if I promise to make the payments on it, with no qualifying and often little or no cash. Which I can then lease/option or sell on a contract to someone else for a nice down payment, a monthly spread, and a future back end payday. Even if they have little equity. Collectibles aren’t sold with financing. And if they were, I’m not sure I’d want to rely on a stamp or coin!

To be able to buy at discount from market is biggest plus against stocks.

And being illiquid, heavy in transaction costs, and the worst part – the time to execute a buy and a sale – is the worst part compared to stocks.

Lastly – stock trading is much harder – but once you get an edge over the market – you’ll never turn to real estate. Just because of the ease of execution. its not a brick and mortar business, no financing, no contractors and materials and rehabs. you buy and sell with a click in seconds.

As a 35-year-plus stock market professional, I’ll tell you that the whole insider thing is much less an issue on Wall Street than many realize. Remember the first adage of journalism: “If dog bites man, it isn’t news. If man bites dog, it’s news.” The insider cases you hear about are examples of man bites dog. They happen, but contrary to what cynical outsiders say, it’s not the norm, and not necessarily because Wall Street types are so morally superior but because much of it its trivial and unreliable.

As to the opportunity to get in early on major developments, stocks and real estate are much more similar than dis-similar. Seeing the trends requires access to no big secrets. All it takes is observation and forward-thinking. Those who do it succeed in either realm. Those who don’t wind up whining.

In real estate, potentially value-producing transformations can be seen a mile away. The hard part of profiting is the inability or unwillingness to assume the risks associated with timing, which can be considerable considering the liquidity challenges one might experience while waiting. Jamaica in the Queens section of NYC is a good example. It and surrounding areas are a far cry from “A” areas. Everybody knows that. It’s also clear to anybody who cares to look that major changes for the better are already under way. But this sort of thing doesn’t happen overnight. Property valuations there are attractive by NYC standards but not everybody can or will jump in. Bug winners will be those that can and will tolerate a long period of minimal or negative cash on cash returns not to mention serious rehab work (hopefully factored properly into pricing decisions) and having one’s L&T lawyers ranked highly on one’s party-invitation and holiday gifts lists.

It’s the same way in the stock market. We know which companies are good and which are dumpster fires. But winning big requires one to be willing to own while CNBC is bashing the daylights out of the company because of the negative earnings surprises and Cramer is yelling “sell, sell, sell” on his nightly show.

I really, really hate these real estate versus stock market articles. Both asset classes have their own valuable characteristics and come with their own risks. And the personal tools for success in both are remarkably similar.